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Crop Insurance Considerations

August 9, 2016

Drought Conditions & Insurance Coverage
The variable moisture levels and growing conditions have led to wide disparity in crop progress and conditions. Farmers with crops that are either stressed by a lack of rain or being considered for alternative uses should consider the type and level of crop insurance coverage they purchased. Most field crops in South Dakota are covered by Federal crop insurance sold by private insurance agents. The most common product is Revenue Protection (RP). In several counties in Western South Dakota, dryland corn may be covered by Noninsured Crop Disaster Assistance Program (NAP), which is administered by the USDA’s Farm Service Agency. Droughts, storm damage, etc. would be natural causes of damage to a crop, ultimately affecting the yield. Such events would be covered by insurance. Farmers should review their coverage on any crops that are susceptible to losses to make sure they understand what they have in place.

Revenue Protection (RP)
Most insurance coverage is specifically designed for the crop to be harvested as grain. In the case of corn, where it could be harvested for silage or hay for feed needs instead of for grain, the farmer should check with their insurance agent so as to not negatively affect their coverage. The value of the silage should exceed the value of the crop harvested as grain plus any expected indemnity payment. This may be difficult to calculate as the crop may still be growing and progressing and the indemnity payment with RP coverage is not settled until the harvest period. If the price level increases during the growing season the coverage may be higher than originally calculated in March 2016, thus changing the value of the corn as grain.

The other feature of RP is the price component, which is particularly relevant when the crop has been forward priced or is slated for on-farm feed use. Again, the final guarantee value with RP is not settled until harvest. Price rallies earlier in the growing season for corn and soybeans gave farmers an incentive to forward price crops that may not be performing as expected. Farmers will want to make sure they have not committed or will not commit more bushels than their insurance guarantee can support. A farmer intending to raise corn for on-farm feed use would see the guarantee fluctuate also. If the price of corn increases by harvest, the guarantee will increase also, leading to a higher indemnity payment that could be used to purchase replacement feed.

Noninsured Crop Disaster Assistance Program (NAP)
NAP coverage does not have the price component feature. Thus, farmers with NAP on corn with feed needs should look at other risk management tools to protect themselves from up-side price risk.

Other Considerations
Insurance coverage options for forages are also available. In South Dakota alfalfa can be covered by Forage Production insurance. NAP is commonly used on non-alfalfa hay and pasture acres. Forages, when covered, are only protected against yield losses, leaving farmers with feed needs susceptible to higher costs not offset by higher indemnity payments. The other common protection, Pasture, Rangeland, Forage (PRF) coverage, has already paid indemnities to those that purchased it. PRF coverage extends to the end of the calendar year.

By understanding the type of coverage they have in place, farmers can better manage through challenging conditions.

Source: Matthew Diersen, South Dakota State University